Reader Note: This is a repost of a February 1, 2013 The Derivative Project Blog Post that was inadvertently deleted.
Federated Investors, the third largest money market mutual fund company has a lot to lose if the FSOC follows through on their proposals to limit systemic risk that money market funds now pose.
“Federated is one of the largest investment management firms in the United States and the third largest manager of money market funds, managing $285 billion in money market fund assets and $380 billion in total assets as of December 31, 2012.”
This systemic risk, now posed by money market mutual funds, could potentially require another bailout by U.S. taxpayers.
For background purposes, here is an excellent article by The Economist, “The SEC’s Dereliction of Duty”, which summarizes the issues posed by the current money market mutual fund industry.
The Economist wrote last September,
“The U.S. Securities and Exchange Commission is supposed to ￼￼￼￼￼“protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” It is odd, then, that the regulatory body decided last week to preserve one of the most egregious loopholes in the entire financial system. Money market mutual funds were effectively declared “Too Big to Fail” by the authorities in 2008 yet remain wholly unregulated. They are the rotten core of the shadow banking system—providing ridiculously cheap leverage to speculators courtesy of the American taxpayer. Money market funds were created to get around bad regulations.”
Federated Threatens the FSOC with Subversion through Public Comment Process
/files/6/7/3/9/5/268450-259376/Professor_McCulloch_MMMFcomment.pdf”>Professor McCulloch. He describes his background as:
“Professor Economics and Finance at Ohio State University, and hold a PhD from the University of Chicago. I have taught Money and Banking for 39 years, during which time I have closely followed developments in banking. I am an expert on the Term Structure of Interest Rates, Financial Intermediation, Deposit Insurance, and the heavy-tailed Stable Probability Distributions that realistically quantify financial risks. ”
We do not know Professor J. Huston McCulloch, other than through this comment at the FSOC. What is known, the reform of money market funds is a critical piece to restoring our financial system to one that most easily facilitates capital formation, lending and liquidity that serves the best interest of society overall. It is a classic ‘money and banking” issue for the decade.
Professor McCulloch clearly responds to each question posed by the FSOC. This is the level of rational, intelligent discussion the public needs to make a determination of the most appropriate role of lending, saving, “shadow banking” and the nature of true reforms to stabilize our financial system. Society needs more Professors, such as Professor McCulloch, to speak rationally and in plain English, on the structure and underpinnings of our current financial system and what is in society’s best interest.
Interestingly, most commercial banks now also have significant investments and profits derived from money market mutual funds, which is why one is not hearing from the traditional commercial banking sector. They are guaranteeing the securitized “junk” and taking their fees on the “junk” being stuffed into the money market funds. Traditional commercial banking is conflicted as to the role of money market mutual funds. Even though traditional commercial bankers know “shadow” banking does not make a stable financial system, they cannot abandon their significant short term profits to seek true reform that will benefit society overall.
As a retail investor, I can attest that the current structure of money market funds does not provide the transparency needed to make informed investing decisions. Baby steps were made in transparency, but they are not enough. Every Wall Street firm leads the investor to believe their money market funds are as same as bank deposits.
Further, there is a viable option to the Federated type money market mutual fund for the average investor in this interest rate environment: FDIC insured sweep options that provide the same liquidity, increased yield and less risk for the average investor.
FSOC, please do not be bullied by Wall Street. The average investor needs your protection.